What it means
A conventional vertical well reaches only the rock directly beneath the rig. Directional drilling steers the drill bit through a planned curve, so that a well can start vertically and then turn to run sideways, sometimes for several kilometres, through a layer of productive rock.
Specialist tools and measurements taken during drilling keep the bit on course. The business reason is access and productivity.
A horizontal well can pass through far more of a thin oil-bearing layer than a vertical one, so each well may produce more. Several wells can also be drilled from one pad, which means one set of roads, pipes and site works instead of many.
Directional drilling also opens up resources under lakes, cities, protected land or other areas where rigs cannot be placed. This can turn a resource that was impossible to reach into one that can be developed, which changes the value assigned to the reserves.
For finance, the trade-off is higher cost per well against better output per well. Directional wells are more expensive because they use specialist crews and equipment, longer drilling times and more complex completion work.
Analysts therefore compare cost per well with expected output, often using payback periods and returns over the life of the field. A nuance is that the expected production is an estimate, and early output often falls faster than the later years.
Reserve and cash flow forecasts built on the first few months of data can therefore be too optimistic, so careful investors ask how long the production figures have been observed. Financing is another angle worth understanding.
Lenders and investors often judge a drilling programme by the cost to find and develop each barrel, and directional wells can improve that figure when they recover more per dollar spent. They also change the timing of spending, because the large upfront cost must be funded before any revenue arrives.
In practice
Real-world examples.
Example
An energy company wants to produce oil from beneath a nature reserve where drilling is banned. It places its rig on permitted land outside the boundary and drills a long horizontal well beneath the reserve. The resource is reached without disturbing the surface.
Example
A producer in a shale field drills eight horizontal wells from a single pad instead of eight vertical wells from eight separate sites. The finance team records savings on site preparation, roads and pipelines. Output per dollar spent rises.
Example
A water utility needs to lay a pipeline under a river without digging a trench across the riverbed. It uses a similar steered drilling technique to bore a path beneath the water. The project avoids closing the river to boats.
Formula
Calculation
Payback period = well cost / annual net cash flow from the well
A vertical well costs $4,000,000 and earns a net cash flow of $1,000,000 a year, so its payback period is $4,000,000 / $1,000,000 = 4 years. A directional well on the same field costs $6,000,000 but reaches more of the reservoir and earns $2,400,000 a year. Its payback period is $6,000,000 / $2,400,000 = 2.5 years. Although the directional well costs $2,000,000 more up front, it returns the investment 1.5 years sooner.Case study
Seen in the real world.
Redstone Petroleum is an illustrative, fictional exploration company with a licence over a thin layer of oil-bearing rock. Its first four vertical wells each cost $3,500,000 and produced oil worth a net $700,000 a year, so each took five years to pay back.
The chief financial officer approved a trial horizontal well at a cost of $7,000,000. It ran 2,000 metres through the oil layer and earned a net $2,100,000 a year, giving a payback of 3.3 years.
The company's board shifted the drilling budget towards horizontal wells but kept the risk in view, because early production can decline quickly. The illustrative lesson is that a higher upfront cost is justified only when the higher output is real and lasts.
Watch out
Common mistakes.
- Comparing the cost of a directional well with a vertical well without comparing their output, which makes the higher price look like waste.
- Extrapolating a new well's first-month production across its whole life, when output usually declines quickly after the start.
- Assuming directional drilling is only for oil and gas, when it is also used for water, geothermal wells and underground utility crossings.
Questions
People also ask.
Why is directional drilling more expensive per well?
It needs specialist crews, steering tools, longer drilling times and more complex finishing work than a straight vertical well.
Does directional drilling change reserve estimates?
Yes. By reaching more of the productive rock, it can increase the amount of oil or gas that is technically recoverable and economically worthwhile.
Is directional drilling riskier?
It adds technical and cost risks, such as a bit leaving the planned path, but it can reduce surface and land-access risks.
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